Oil prices could spike by as much as $175/bbl according to a new analysis of the impact on oil markets of an Israeli attack on Iran and subsequent closure of the Strait of Hormuz.
“Concern is rising among officials in Washington and Jerusalem that Israeli leaders increasingly favor unilateral military action to slow Iran's pursuit of a nuclear weapon,” said Robert McNally, head of the Washington, DC-based Rapidan Group.
Israeli leaders have said they favor a diplomatic solution, but a spate of Israeli media reports on a possible strike have appeared this week, accompanied by veiled threats from top politicians.
In a speech to parliament this week, Israel’s Prime Minister Benjamin Netanyahu said a nuclear-armed Iran would pose a "dire threat" to the world and "a grave, direct threat on us, too."
Meanwhile, according to McNally, press in Jerusalem and Washington is starting to get wind of the possibility of an attack, and “reports may filter into the broader market consciousness, which remains complacent.”
In an effort to determine the impact of such an attack on oil markets, Rapidan asked market participants what price response they would anticipate, taking into account current supply, demand, and stocks fundamentals.
According to McNally, a White House oil advisor in 2001-03, the new survey points to a price reaction somewhat stronger than a similar one undertaken last in December reflecting “tighter fundamentals” since then.
According to the survey’s results, oil prices would rise on average by 23% in the first hours of the attack. However, some market participants anticipate a spike of close to $45/bbl.
Rapidan Group asked market participants about their price view 30 days after the attack, taking into consideration the magnitude of the supply disruption and the response of the International Energy Agency.
Participants said prices would increase by $11/bbl under Rapidan’s short disruption scenario: Change in crude prices relative to prestrike levels after 30 days, assuming a short disruption only in Iran’s oil exports lasting just a few days without any other interruption in supply.
Participants said prices could rise by $61/bbl under the prolonged disruption scenario where IEA stocks are used. The scenario includes price change 30 days after an Israeli strike, and assumes a 21-day disruption of oil traffic through the Strait of Hormuz before returning to normal throughput of 15.5 million b/d. IEA countries offset half the loss with around 8 million b/d.
Participants said prices could rise by $175/bbl under Rapidan’s prolonged disruption scenario, where no IEA stocks are used. The scenario looks at price change 30 days after an Israeli strike, and it assumes a 21-day disruption of the Strait of Hormuz before returning to normal throughput of 15.5 million b/d.
The chance of an Israeli attack on Iran could be increased following a report by the International Atomic Energy Agency due next week, especially if it confirms that Tehran is working to develop a nuclear weapon as Western powers believe.
Contact Eric Watkins at email@example.com.